By now most of you have seen the revised Option ARM reset schedule.
There is one more variable that this schedule does not capture, and neither does the ARM reset schedule: people who give up early. Being trapped in a property you cannot sell is torture. You just want to be released from your obligations and go about your life. Begging for mercy probably doesn't help much, but it might make some of these sellers feel better.
Today's featured property is an Option ARM holder who gave up early.
I enjoy looking back on some of the nonsense and denial among the bulls. I came across this one recently: Was there a Housing Bubble?
If you can't see a housing bubble in February of 2008, you are truly blind. Here is my favorite piece of analysis, "Prices will probably drop some more but personally I don't expect to
ever again see index values around 110 (referring to Case-Shiller). Do you? If we don't see the
massive drop back to "normal" levels then the run up in prices should
be described as a shift to a new equilibrium - much as happened during
World War II - see the chart. (It's an important question to ask what
changed and why?). In the shift to the new equilibrium there was some
mild overshooting, especially due to the subprime over expansion, but
fundamentally there was no housing bubble."
His argument or observation shows the wanton ignorance of real estate economics displayed by most purchasers during the bubble. He examines a chart showing a stable, 50-year trend in house prices, and makes the assumption that this is not based on fundamentals, and there is some new fundamental out there that is going to establish an equilibrium at some higher price level. He asks and fails to answer the key question "What changed?" The answer is a wild expansion of credit and a total abandonment of lending standards while simultaneously embracing unstable loan programs. In short, a bubble. His failure to recognize what happened is why he cannot fathom a price drop back to the fundamental price levels stable for the previous 50 years.
It reminds me of a bullish post I saw over at the OC Register Blog some time ago. One of the posters was chiding Peter Schiff by saying that anyone who predicts a 50% decline in home prices has lost all credibility because such a price decline was simply not possible. Oh really? I remember the indignation of the poster -- or was it ignorance -- I guess it is all the same for bubble bulls.
Let's take a trip down memory lane. Tell us about the most ridiculous bullish comments you heard during the bubble, or post links to bullish articles and prognostications that have proven to be totally wrong.
I might be wrong I might be wrong I could've sworn I saw a light coming on
I used to think I used to think There was no future left at all I used to think
Open up, begin again Let's go down the waterfall Think about the good times and never the bad Never the bad
What would I do? What would I do? If I did not have you
Open up and let me in Let's go down the waterfall Have ourselves a good time, it's nothing at all It's nothing at all Nothing at all
I hope you are enjoying your 4th of July holiday. Like many others, I am not traveling this year, and instead I am staying near home and spending the day with my family.
When George Washington lead the Continental Army across the Potomac River on Christmas Eve to surprise the Hessian mercenaries camped on the other side, he took an enormous risk to secure the future of our country. He and the soldiers he commanded are heroes to all Americans. Today's featured property is on Potomac in Irvine. It is a sad story of how corrupted our great country's financial system has become. The people involved with this property are not heroes.
Are the high-end homes in Irvine plated with marble? The asking prices would make you think so. Today's featured property was purchased by a knife catcher at auction. No improvements have been done to the property -- no marble -- and now they want $260,000 for their efforts. Oh wait, they made no effort. They just want $260,000 just because. This is the kind of behavior that makes house prices unaffordable, and it is exactly the kind of behavior this market is going to crush out of existence.
Do you get the impression from the behavior of speculators and HELOC abusers that it isn't their problem? I do. Today's featured property was bought in 2005, the equity was quickly extracted right up to the peak, and now that prices are dropping, the speculator is simply walking away. It isn't his problem anymore, it is the problem of Residential Mortgage and Investment, Inc. or whatever CDO the loan was packaged into.
Day after day, we document lenders taking huge losses. It is not the kind of thing that promotes a loosening of credit and increasing prices. Yet there are still people trying to flip houses (a post for another day, perhaps.) WTF? Do people have so little understanding of credit markets that they believe lenders are suddenly going to go back to the practices of the bubble? Faced with daily huge losses causing unprecedented price declines, lenders will become more restrictive of credit -- much more. Either that or they will go bankrupt (I am still waiting on Countrywide, IndyMac, Downey and WAMU.) Prices will fall to the point where people can afford to buy houses with a conservative percentage of their income because lenders will require it. The days of DTIs in excess of 28% may return again someday, but not until that becomes the standard for quite a while. Lenders will retreat to this level because they know people can really afford that. That will become the standard until people stop defaulting. People are going to continue to default until prices stop declining and they stabilize at affordable levels. That is just the way credit markets work.
Many people fueled the market rally with a frenzy of fear buying. Fear
of being priced out of the market, and fear of missing the great
profits to be made through home ownership. Those who did not participate by wanted to
became the stereotypical "bitter renters." These
people were bitter because they believed the nonsense of kool aid
intoxication, and they believed that they missed their chance. Of course, over the last year,
many of these people got their chance and became knife catchers.
Today's featured song encapsulates the feelings people had toward
houses and those who owned them -- they were so high above them. The
bitter renters were jealous and felt unworthy. Little did they know...
Dr. Housing Bubble has an ongoing series he calls "Real Homes of Genius."
He profiles really awful properties in bad neighborhoods going for
ridiculous prices. There is an intuitive revulsion from seeing these
properties and the prices attached. It does not take a sophisticated
financial analysis to recognize the housing bubble when viewing these
properties. We don't have any run down properties of that sort in
Irvine, but I remember having the same revulsion when I would
see 1 bedroom condos going for over $400,000. I don't care how used to
bubble prices you get, when you see tiny condos going for $400,000, the
mind simply cannot grasp it. These prices were just wrong. No amount of
kool aid could drown out the doubts about the prices of these units. Of
course, the people who bought these units almost exclusively used 100%
financing, so it didn't really matter what they paid, and they did not
care. It wasn't their money. An Option ARM with a 1% teaser rate made
owning one of these cheaper than renting, and in due time, it would be
selling for millions. Even if it didn't, any losses would be someone
else's problem -- which is where we are now. Today's featured property is a simple 100% financing deal gone bad. It is the collapse of prices at the low end of the market like this one that are serving as a drag on market prices, and they will continue to do so until we reach the bottom.
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